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ACA Nondiscrimination Penalties -- Self-funded


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As you all know, guidance (and enforcement) is forthcoming for fully-insured plans on nondiscrimination. Notice 2011-1 indicates that a fully insured plan that discriminates against non-highly compensated employees will be subject to civil monetary penalties of $100/day multiplied by each non-highly compensated employee that was discriminated against.

For self-insured plans, however, violating 105(h) only results in the HCEs losing a tax benefit. Or so I thought.

The BNA Benefits Guide states:

Self-insured health benefits plans that discriminate in favor of HCEs are subject to a less onerous tax regime. Such plans that violate tax code Section 105(h) must pay a $100 excise tax per day on each beneficiary who receives discriminatory benefits in their favor, rather than the $100 per day penalty that applies to an insured plan for each individual discriminated against.

Is this correct? I can't find any supporting authority for it and there's no citation. I thought loss of tax benefits was the only consequence for fully funded plans.

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Close. In a self-insured plan the penalty is applied to the HCE's, and they must claim the excess reimbursement as gross income. (see treas. reg 1.105-11(e). There are also some penalties for willful, such as fines and jail time, but I have no idea if that has ever been done.

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If that is what the BNA manual states it is incorrect (and it's not even close). There is no $100 penalty for HCEs under the self-insured plan rules. As lvena states, the consequence is that HCEs are taxed on the the excess reimbursements that they receive.

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